An assembly of state insurance regulators endorsed a new system for determining how much money life insurers must hold in reserve to cover future claims, potentially giving individual companies and regulators greater flexibility.

Where standard industry-wide formulas have long dictated reserve requirements, the plan endorsed this week by the National Assn. of Insurance Commissioners would establish what the group calls “principles-based” reserving based largely on the risks related to individual products.

The group said the plan would lead to more accurate reserves, raising requirements for some insurance products and lowering them for others.

Critics have said principles-based reserving would give insurers greater discretion when making decisions that can profoundly affect their profits, their financial stability and their ability to keep promises to policyholders. Earlier this year, New York Life Vice Chairman Gary Wendlandt described it as a “trust me” approach to regulation.

Higher reserve requirements may provide added protection for policyholders, but they can also make insurance less affordable.


On Wednesday the insurance commissioners group approved a new model law, which will next be submitted to the states for ratification.

Connecticut Insurance Commissioner Thomas R. Sullivan, a former insurance executive who chairs a key committee in the commissioners group, said the proposed law would make it easier for regulators to set reserves for new types of insurance.

“First and foremost, we’re protecting consumers and making sure the reserving standards are responsive to product designs and changes,” he said.

The changes would apply only to reserves for new policies issued in the future, he added.

The group had been working on a shift to principles-based reserving for several years, at the urging of insurance companies that argued that certain reserve requirements were excessive.

If adopted, the model law would work in tandem with revisions that are still in progress to a manual from the insurance commissioners group that would help regulators apply the law.

The proposed approach to reserving would not become operative until the law is adopted in 42 states and the states adopting it represent 75% of the insurance market, measured by premiums.

Wisconsin Insurance Commissioner Sean Dilweg, one of two who voted against the model law, said he sought unsuccessfully to have minimum reserves written into the model law, not just included in the NAIC manual. “I’m afraid that the consumer may not have the reserves there when we face a future financial crisis,” Dilweg said.


Hilzenrath writes for the Washington Post.